THE TAX BILL OF 1986

THE TAX BILL OF 1986; U.S. TAX BILL MAY FORCE NEW YORK TO CUT HOUSING AND PUBLIC WORKS: Entrepreneur Curb Seen

By ERIC N. BERG

Published: August 20, 1986

Venture capitalists, who provide the seed money for risky but promising new businesses in the hope of giant returns, say the proposed revision of the tax system will harm newborn companies that have become so important to the economy.

They argue that entrepreneurs deserve credit for creating jobs and economic growth. Some of the most prominent names in technology - from the Data General Corporation to Apple Computer Inc. to the Rolm Corporation - received their initial sustenance from venture capitalists and benefited from the dedication of entrepreneurs who broke away from the corporate world to try to strike it rich.

But the tax bill, these critics say, will make venture capital less attractive for investors, diminishing the supply of funds to inventors and other entrepreneurs. Also, they add, successful entrepreneurs who finally profit by selling some of their shares will pocket less than under current law.

''We are sending out a clear message to entrepreneurs that we don't think they're so special,'' said Stanley E. Pratt, chairman and chief executive of Venture Economics Inc., a Boston-based research and consulting firm. ''What the Government is saying is, there is no reward for taking risks and going long term.''

Thomas J. Perkins, the general partner in Kleiner & Perkins, a San Francisco-based venture capitalist, said the tax bill was ''a big step in the wrong direction, but it won't shut down the industry.''

For one thing, in recent years increasing numbers of pension funds have been buying into venture capital projects. Since they typically pay no tax, the incentive for pension managers to finance new companies should not change.

Additionally, even for many taxable investors, the allure of earning high after-tax returns will still be there. Venture capitalists say they are likely to become more selective, financing only those projects that hold out the promise for the fattest returns. Fewer Deals Expected

Nonetheless, virtually all aspects of venture capital would change under the proposed law, experts in this business said. They forecast that fewer deals would be completed, lower returns would be earned after taxes, and some affluent people would begin to shy away from the projects.

Although the after-tax return from successful projects will still be high, the amount of money flowing into venture capital funds is expected to fall along with the number of projects begun. Fledgling companies will struggle to find seed financing, and existing concerns will have to hunt for growth capital.

At issue is the rise in the top capital gains rate, to 28 percent next year from the current 20 percent.

Experts say investors will think twice about buying into venture capital projects, which are typically long-term in nature and riskier than conventional, income-oriented investments such as bonds. They have long maintained that venture capital is fueled by tax advantages. High Rate Cut Funds

As evidence of that, in the mid-1970's, when the top capital gains rate was 49.2 percent, venture capital hardly existed. When the rate was cut to 28 percent in 1978, venture capital blossomed, with hundreds of millions of dollars flowing into venture funds.

The industry soared when the rate fell to 20 percent, in 1981. It peaked in 1983, with roughly $4.3 billion in new money committed that year.

''Rather than getting into venture capital people will say, 'Maybe I'm better off being a coupon-clipper,' '' a reference to owning bonds, said David A. Berenson, national director of tax policy at Ernst & Whinney.

For projects to survive, experts said, they would have to produce more current income and less in capital gains than now. That is because investors may not want to wait years, earning nothing in the interim, for the capital gains. And to the extent that projects do hold out the promise of big capital gains, those gains will have to be more certain than in the past.

''You will see a shift away from conceptual, pie-in-the-sky deals and more into hard-dollar deals,'' said Gary Takata of Seed Equities, a New York-based venture capitalist.

Venture capitalists specialize in placing money from wealthy individuals and institutions into a nascent business enterprise. They sometimes take control if things go wrong. Far Fewer Candidates

Seeking safer projects, many venture capitalists could come up with far fewer candidates than in the past. The idea of turning venture capital investments into income-producing properties is, to many experts, incompatible with the very notion of venture capital. Almost always, venture capital companies must hold onto every penny they earn to pay for vital research and development and to finance growth.

''Our problem is that, in an early stages company, there just isn't a lot of cash to go around,'' said Richard A. Farrell, a general partner in the Venture Capital Fund of New England, a Boston-based concern.

And venture fund managers are expected to lobby fiercely in coming weeks in a last-ditch attempt to beat back the proposed law.

''The venture capitalists are the one group that screamed bloody murder about this bill and they will continue to do so,'' said Bernard H. Tenenbaum, associate director of the Snider Entrepreneurial Center at the University of Pennsylvania's Wharton School.

Graph shows amount of new capital committed each year to venture industries (Source: Venture Economics,Inc.)